Explain why D’Aveni’s model applies in the industry.
Ans: During the last few years, industries have observed a drastic shift and have evolved from slow-moving, from a small number of dominant firms to large environments, along with intense and competitive features in which rivals compete with each other using their unexpected moves and strategies (D'Aveni, 1998 p-183). They have now become “hypercompetitive" who are continually involved in creating new competitive advantages that may be able to destroy, compete and neutralize the advantages of the industry leaders and other rivals and hence leading to disorder and chaos in the industry (Reese & Shoemaker, 2016, p-390).
This has spread to different industries such as pharmaceuticals, health care, airline, automotive, and computer industries along with many more (D'Aveni, 1998, p-183).
In 1992, the chief executive officer of General Electric, Jack Welch said while describing competitive practices that “it is going to be brutal” (D'Aveni, 1998, p-183).
In the 1960s, a full range of cars based on size and engine power was provided by GM from the Chevrolet (low-priced small car) to the Buick to the Oldsmobile to the Cadillac (high-priced large car). The same was done by Ford and Chrysler. The foreign competitors attacked the low end (Volkswagen, Honda, and so on) and the high end (Mercedes Benz, Rolls Royce, and so on). Gradually, many niches were attacked by the aggressive hypercompetitive in between the existing price-quality points (D'Aveni, 1998, p-187). In the 1970s, the way to define a good car changed from being the biggest and most powerful to be fuel-efficient. Some foreign players took advantage of this and excelled while it led to the fall of traditional U.S. car companies (Sukhodolov, 2019, p-5). As the producers of cars in the U.S gained popularity, the good car was redefined in the 1980s by foreign competitors as being reliable and durable. And it again let to the fall of U.S companies. However, everything again changed by the 1990s as the U.S. car producers started to retake their share in the home market (Ghobadian et al, 2020, p-457). They significantly reached the standard of reliability but also defined their advantage of quality and safety. They used antilock brakes, airbags, crash tests, and stronger body designs which led to leaving behind the foreign competitors. The foreign firms were still involved in making efforts to become more reliable for consumers. In the future also, it is expected that a new definition of quality will emerge which no one knows but the company which will invent it will grab this initiative from its rivals (D'Aveni, 1998, p-187).
The example of car producers clearly describes how D’Aveni’s model can be applied to the car industry. Hypercompetition does not result from global recessions. It is not the consequence of global overcapacity in most of the industries. It won't go away on its own, and it cannot be restricted by wishing to go back to good old days. Even the powerful giants of the industry such as IBM, Kodak, and General Motors are not able to stop it (D'Aveni, 1998, p-184).
Four well-known, fundamental driving forces have conspired to “heat up” markets all around the world. First, consumers expect a great deal more value in the products they buy. They are no longer content to get what they pay for. They want more, they want it their way, and they want it now. Even well-recognized and well-respected brand-name products cannot escape the pressure. Marlboro, Kraft, Gerber, Tampax, and many other world-renowned brands have fallen victim to lower-priced, private-label goods of equal quality. Today’s world is a buyer’s market (D'Aveni, 1998, p-184).
Identify the spheres of influence. Include an assessment of how pivotal zones, buffer zones, and forward positions contribute to stability in the market.
Ans: According to D’Aveni, like nations, companies create spheres of influence. These spheres of influence are used by the company to protect its core products and markets. They help to weaken the rivals and minimize the chances of price wars. Once a price war is initiated, it will lead to mutual destruction (D’Aveni, 2004, p-46a).
As per D’Aveni, a corporate sphere of influence consists of different layers and each layer plays a specific role (D’Aveni, 2004, p-46a).
Following are the spheres of influence in the car industry:
The core: This includes the main products and markets for an organization, these serve as the main source of profit. The last five years had been extremely disorderly for automobile manufacturers. The consumer’s preferences have been shifted from fuel-guzzling pickup trucks to smaller and more fuel-efficient cars due to the increasing environmental concerns and skyrocketing fuel prices. The automakers have accepted the change by growing their small-car portfolios and have diversified their production of hybrid electric motor vehicles (Nkomo, 2013, p-1).
Vital interests: The vital interests include those markets and products which are used to support the core products. They provided complementary strengths or resources to the core. These include raw materials or labor and their role is to strengthen the core.
The automobile demand is directly related to the price of vehicles, the per capita income, prices of fuel, and level of product innovation. The price at the supplier's end stems from the cost of raw material and equipment (Nkomo, 2013, p-1). Along with this, the higher prices of steel and plastic raise the cost of manufacturing and which leads to an increase in retail prices. During the last five years, the automakers are facing high prices of steel and plastics which has raised the product manufacturing costs and product price. The increase in per capita income leads to an increase in the affordability of consumers. During times of low economic growth, incentives are used to initiate sales. In these five years, there has been a substantial increase in the number of financing companies of automobiles in the BRICs. This has led to increasing loans of automobiles helping the consumers to buy more and has resulted in stronger demand in the industry (Nkomo, 2013, p-1).
Buffer zones: These are the products or markets which save the organization from the attack of the competitor who might be seeking to enter the core (Romano, 2005, S-12). They form a small amount from the revenues or profits of the company which the company can afford to lose. They may include some useful products that may help to block the competitors and create an entry barrier using some of its products.
A few decades ago, an automotive industry had only a limited variety of cars to offer its customers. However, today it is not so. The industry has become technologically so advanced that the customers are now having a lot of choices from different automakers. However, advanced technological strength alone cannot be considered as a sustainable competitive advantage (Frahana, & Bimenyimana, 2015). There has been an evolving consumer behavior that influences the purchase decision. The consumers are ready to pay more for extra features and distinctive curvature of the car. Therefore, certain companies like SUV have started to use symbols of class for a sporty look in most utility vehicles. This has created a sustainable advantage and increased the level of competition (Frahana, & Bimenyimana, 2015).
Pivotal zones: These are the market areas that have the power for the future. These are the products or markets for future growth.
The companies make strategies and efforts to raise the corporate value, The promotion of business and reforms of cost structure helps the companies to respond to the changing market conditions. They are seeking to build environmentally conscious and eco-friendly products for delivering them to the global market (Macdonald, 2011, p-549).
Forward positions: A company may be involved in products or markets near to the competitor's products. These may be used by one party to weaken the other party's core and they help to create stability. If there is a competitor that has a similar core product, then neither of the two-party undermines other's core due to the threat of starting a price war (Nkomo, 2013, p-2).
Critically evaluate the effectiveness of each sphere of influence.
Ans: Assessing the spheres of influence of competitors can help to get an understanding of the relative balance of power in an industry. For instance, consider the relative balance of power between Toyota and General Motors (D’Aveni, 2004, p-46b). GM has its core in the large-car and pickup categories of trucks in North America. However, it has gained power in the small-car market to build a buffer against the competitors of Japan. Toyota made use of its small car core to enter the Japanese market in North America and it then diversified its offerings by including larger cars, luxury cars, and pickup trucks. Toyota attacked the core of GM more aggressively than the way GM attacked Toyota. While the balance of power seemed to be in favor of Toyota today, but the future is full of uncertainties. In Europe, both the countries had established their interests, However, the Opel division of GM had a much longer lead in building market there (D’Aveni, 2004, p-46b). While in long run, the positions of both companies in pivotal zones like China, may lead to disturbing the balance of power in the industry, No.2 position was occupied by General Motors in China and Toyota is not positioned powerfully in the pivotal zone. The challenge of aging demographics is also faced by Toyota in its home market, which will result in decreasing demand for its cars in its core which is profitable. Meanwhile, in the U.S., due to its OnStar system, its favorable financing, and its migration to the sport-utility vehicle market, GM has experienced a recovery (Brajlih, Valentan, Balic & Drstvensek, 2011, p-65).
Even though the brand of Toyota is established among the baby boomers, GM has introduced different products of luxury which are reacquiring units as it ages and has been involved in the introduction of several products to target the youth market. Along with the core strength of the companies and pivotal zones, the effectiveness of buffer zones and forward positions and the threats of management also affect the relative power of spheres (D’Aveni, 2004, p-46b).
By analyzing competitors' spheres, it is possible to know and understand the balance of power. It can help to determine the parts of rivals which represent forward positions or opportunities for offensive actions. It gives the company an idea for a better estimation of where the buffer zones need to be created to overcome the pressure from the rivals. It also helps in knowing about an opportunity for using offensive pressure and taking advantage of the rival's weaknesses (D’Aveni, 2004, p-46c).
The sphere of influence acts as a framework that helps the companies to consider a deeper understanding of the portfolio of a company which goes beyond the simplicity of narrow focus or the complications of financially linked conglomerates. The strategies identified through spheres of influence are not just related to financial or operational fields but they are related to the fundamental part of the portfolio and how they can be collectively used for creating market power over competitors (D’Aveni, 2004, p-46a).
Brajlih, T., Valentan, B., Balic, J. and Drstvensek, I. (2011), "Speed and accuracy evaluation of additive manufacturing machines", Rapid Prototyping Journal, 17(1), 64-75.
D’Aveni, R.A. (2004). The Balance of Power. MIT Sloan Management Review, 45(4), 46a-46i. Retrieved from: https://sloanreview.mit.edu/wp-content/uploads/saleable-pdfs/45415.pdf
D'Aveni, R. A. (1998). Waking up to the new era of hypercompetition. Washington Quarterly, 21(1), 183-195.
Frahana, M., & Bimenyimana, E. (2015). Design Driven Innovation as a Differentiation Strategy – in the Context of Automotive Industry. Journal of Technology Management & Innovation, DOI: http://dx.doi.org/10.4067/S0718-27242015000200003
Ghobadian, A., Talavera, I., Bhattacharya, A., Kumar, V., Garza-Reyes, J. A., & O'regan, N. (2020). Examining legitimatisation of additive manufacturing in the interplay between innovation, lean manufacturing and sustainability. International Journal of Production Economics, 219, 457-468.
Macdonald, K. (2011). Re-thinking “Spheres of Responsibility”: Business, Human Rights and Institutional Action. J. BUS. ETHICS, 99, 549.
Nkomo, T. (2013). Analysis of Toyota Motor Corporation.
Reese, S. D., & Shoemaker, P. J. (2016). A media sociology for the networked public sphere: The hierarchy of influences model. Mass Communication and Society, 19(4), 389-410.
Romano, J. (2005). Spheres of influence: minuscule balls of nickel may well help power cars and usher in the hydrogen economy. Mechanical Engineering-CIME, 127(4), S12-S12.
Sukhodolov, Y. A. (2019). The notion, essence, and peculiarities of industry 4.0 as a sphere of industry. In Industry 4.0: Industrial Revolution of the 21st Century, 3-10. Springer, Cham.
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